Big Reverse Monetization Kicks Off 2018

Prior to the start of 2018, several members of the Editorial Advisory Board (EAB) of Healthcare Real Estate Insights™ predicted that the sector would see some transactions in which health systems would buy medical office buildings (MOBs) that they are leasing from third-party owners.

In such so-called “reverse monetizations,” as EAB members called the transactions, the health systems buying the properties might be looking to gain control of as many of their operating costs as possible. Or, they might simply consider buying the MOBs they occupy to be a good business decision, in part because of a new lease-accounting rule by the Financial Accounting Standards Board (FASB) requiring them to recognize all leases on their balance sheets.

Whatever the motivation, it didn’t take long for the first reverse monetization to take place in 2018.

According to data from real estate research firm Real Capital Analytics and a report prior to the sale in the Milwaukee Business Journal, Milwaukee-based Aurora Health Care in January acquired 18 properties with a total of 1.4 million square feet of space from Toledo, Ohio-based Welltower Inc. (NYSE: HCN) for $433 million.

Tami Kou, a spokeswoman for Aurora, confirmed the sales agreement prior to the sale in an interview with the Milwaukee Business Journal. Aurora is the largest health system in Wisconsin with 15 hospitals and more than 100 other locations.

Welltower acquired 17 of the 18 facilities in Q1 2010, according to a news release and supplemental data that Welltower filed with the U.S. Securities and Exchange Commission (SEC) at that time, when the company was known as Health Care REIT.

In the supplemental filing, Welltower indicated that its total investment in a 17-property “Aurora portfolio” was $190 million at an initial first-year yield, or cap rate, of 9.1 percent. In addition to that, the file shows that the REIT also invested in the development of another MOB in its Aurora portfolio, bringing its portfolio to 18 properties and a total “investment balance” in its Aurora portfolio of $312.8 million – a figure that could include, among others, transaction costs and depreciation.

Among the buildings included in the portfolio are the on-campus Aurora Health Care Medical Group building, 2801 W. Kinnickinnic River Parkway in Milwaukee for a price of $54 million, and the Aurora Medical Center building in Kenosha, south of Milwaukee, for $24 million.